FTSE lower as financial stocks fall

The FTSE 100 gave up some of the previous day's gains as dealers looked ahead to the US interest rate decision later on Wednesday.

Banks came under selling pressure on news of a further $4bn in subprime-related writedowns at UBS (NYSE:UBS) and negative comments from Citigroup (NYSE:C) weighed on Royal Bank of Scotland and Barclays (NYSE:BCS).

After closing almost 100 points higher on Tuesday, the main index ended Wednesday's session 45.6 points, or 0.8 per cent, lower at 5,837.3.

The US Federal Reserve is set to deliver its rate decision after the close of trade in London. While most strategists expect a further 50 basis points cut in rates - which would take the Federal funds rate down to 3 per cent - anything less would come as a blow to equity markets.

In opening New York trade, the Dow Jones Industrial average lost 0.3 per cent to 12,438.4, a fall of 37 points.

US investors were mulling over news of weaker than expected US economic growth in the fourth quarter of 2007. Gross domestic product rose 0.6 per cent, down from a 4.9 per cent rate in the third quarter. Economists had expected a 1.2 per cent rise in growth during the fourth quarter.

UK banks were lower as Citigroup reiterated its "sell" recommendation on RBS and Barclays. Citi warned both looked vulnerable to a recession and warned their levels of leverage were significantly higher than in the late 1980s.

Tom Ratyner, analyst, cut his target on RBS (down 3.6 per cent to 387½p) from 400p to 350p and on Barclays (down 2.6 per cent to 482½p) from 450p to 400p.

He wrote: "Barclays and RBS appear more vulnerable than in the last cycle. The key difference is the increased leverage, which arguably leaves balance sheets less able to withstand a sharp increase in impairment charges. Dividends also appear less secure, with free cash flow under pressure and payouts representing a significant part of each bank's capital base."

News that Alistair Darling, UK chancellor, is drawing up plans to require banks to put billions of pounds into a revamped scheme to compensate savers in the event of the collapse of a major lender added to the downside.

As uncertainty continued to surround the future of stricken lender Northern Rock, its shares were 2.5 per cent lower at 109¼p.

Standard Life lost 1.8 per cent to 224p as better-than-expected new business figures from the life assurer was overshadowed by a warning of challenging trading conditions ahead and the resignation of Trevor Matthews, head of its UK retail division.

Mr Matthews is joining Friends Provident, which lost 4.4 per cent to 155.2p, reflecting the view that the appointment would bolster Friends' attempts to remain independent.

Shire, the drugs group, continued its recent weakness, down 3.9 per cent to 899p, after a downgrade from Goldman Sachs.

Of the risers, Rio Tinto was up 3.2 per cent to £48.19 amid reports that BHP Billiton (NYSE:BHP) was considering significantly increasing its offer for its rival. BHP slipped 0.2 per cent to £14.46.

Next fell 1.3 per cent to £13.56 after rising earlier in the session when Citigroup upgraded its rating on the retailer from "hold" to "buy". The bank said Next was able to repurchase a further £300m of stock as part of its share buy-back programme without risk to its BBB credit rating.